Long way to go before inflation eases, says RBI

Even as record low crude oil prices soften inflation levels in the country, the Reserve Bank of India feels the price index still has a long way to go before it eases further, as overall input costs continue to remain steep.

Even as record low crude oil prices soften inflation levels in the country, the Reserve Bank of India (RBI) feels the price index still has a long way to go before it eases further, as overall input costs continue to remain steep.

“The risks still remain. On inflation, there is still a long way to go. There are structural issues also. We are seeing high inflation in rural areas,” RBI deputy governor HR Khan told a gathering of chief financial officers at a summit organised by the Confederation of Indian Industry.

The central bank’s stance comes in the wake of calls by industry captains who have lobbied for an interest rate cut. Finance minister Arun Jaitley, too, joined hands with the industry when he hinted that economic conditions are ripe for a rate cut.

High inflation is usually cited as one of the main reasons for central banks to maintain status quo on interest rates or raise them, while falling prices could prompt a reduction in borrowing costs.

The consumer price index-based (CPI) or retail inflation grew to 6.46% in September, lowest in three years, mainly due to falling oil and food prices, the two major constituents in the CPI basket. India imports about 80% of its fuel requirements. Price of crude oil, which in 2013 reached $100 a barrel, has now softened to about $82.

The RBI has set a retail inflation target of 8% for next January and 6% a year later.

“Forming the monetary policy (in the context of changing geopolitical factors) has its limitations,” Khan said. “Projections are changing due to uncertainties.”Stating that he is “chastened” bythe massive jump in foreign investments by Indian companies, Khan chided them for not doing enough research before taking their decisions, as many had to exit such investments in distress. “You’ve gone without proper research, due-diligence and adequate planning. So you now see a large-scale disinvestments of such assets happening.”

Khan said Indian companies would have to address major challenges, including exposure to large debt. According to RBI data, India Inc raised $3.17 billion from overseas markets in September this year, down 5.3% from last year.

Lauding the steps taken so far, Khan said getting complacent has its own risks. “Stability has the potential to become complacent. We are in an environment of Black Swans. On the domestic front, growth recovery is tepid but sentiment is good. Capital and investment cycle are yet to pick up. Since we are coupled with global economy we can’t be insulated by global uncertainty.”